If your business needs more money, you may want to tell it bankers to lend you money or to investors to invest money in your business. Taxman also wants to hear about your business to assess tax. And you and your managers want to know how you can improve or make more profit from your business.
Thus, we can categorize those people/organizations into three (3):
- People within the organization or internal users, like you and your managers;
- People outside the organization or external users, like bankers & investors; and
- Government or the taxman.
Because there are three (3) different users, we need to use three (3) different languages. These languages are sometimes called:
- Managerial Accounting for internal users.
- Financial Accounting for external users.
- Tax Accounting for government.
For Managerial Accounting, there is actually “no rule” or “no regulation “, because it is used internally / within the organization. For Financial Accounting, the regulation is called GAAP (Generally Accepted Accounting Principles). And for Tax Accounting, which is regulated by government, the rule is called ITA ITA (Income Tax Act).
To give examples, annual budgeting, sales performance, variance analysis & other internal reports, are form of Managerial Accounting. Balance sheet, income statement (profit & loss), statement of cash flow, & statement of changes in equity, are form of Financial Accounting. While T1 form of your personal tax return and T2 form of your corporate return belong to Tax Accounting.
Thus, “Accounting“ essentially is : a language of business ( information system) that
- Identifies what information to be included/excluded from the business;
- Record that information (that produce reports); and
- Communicates that information to three (3) different users :
- Internal users, which is called Managerial Accounting, non-regulated ;
- External users, which is called Financial Accounting, regulated by GAAP; and
- Government, which is called Tax Accounting, based on ITA.